Several methods for valuing a startup, particularly those without revenue, such as the Berkus Method and the Scorecard.
Several methods for valuing a startup, particularly those without revenue, such as the Berkus Method and the Scorecard Method. It also touches on the importance of valuation for credibility and investor relations.
Hello, everyone. This is Alejandro Cremades, and today we’re going to be talking about how to value a startup without revenue. Figuring out the valuation of a company is an art. They’re going to be expecting you to have that on the investor’s side, on the potential acquirer’s side, but startups, especially when they’re born, have no revenue. In today’s video, we’re going to be walking you through the different methods of valuing a startup and to understand what that price tag could be on your business so that you’re able to make deals the right way and in your own way. With that being said, let’s get into it! Why is the valuation so important for startups? At the end of the day, you are going to go into fundraising rounds, or perhaps your company, at one point, is going to be acquired. For that reason, either the investor or the company that is acquiring you needs to understand what the
price tag is and the value of your business so they can pay you in the form of stock or in the form of cash. That’s for the acquisitions. For the investors, essentially, they would be investing money and receiving in exchange equity ownership in your business. Another thing or another area of why the valuation is so important is because it gives you credibility. It gives you credibility toward the market. You’re going to be seeing all the time on the press that Company X or Company Y has raised x-amount of money at x-amount of valuation, and that is telling the market that there’s a credible source that has come in – maybe a credible investor or whoever that is, for example, on the investment side, that has come in and has made an investment at a certain value. Since they are sophisticated investors, it’s telling the world that your company is valued at that amount. The traditional way
of valuing startups is the EBITDA. It’s the earnings before interest, tax, depreciation, and amortization. What this means is that you are going to be putting a multiple or whatever value you put on top of that, but it’s like buying/paying dividend stock or perhaps a real estate property that is very straight-forward stuff. The thing is that most startups – if I have to say like all of them, maybe there are some exceptions where there’s like a spinoff of a big corporation into a smaller entity – but all of the startups start with absolutely zero revenue. In this case, you’re going to have to come up with non-traditional types of valuation for startups, but going to the other methods that are going to help you to understand what the price tag is that you want to put in your business. Now, you need to remember that whenever you are going to negotiate, maybe you’re going out to raise a
round of financing, or you’re going out to sell your business, or you’re speaking with potential acquirers, they’re going to ask you for your valuation. Here’s the thing: you never want to talk first because if you talk first, you’re going to lose. What I mean by this is that whenever they ask you for a valuation, if you make the mistake of giving the valuation first, they are always going to negotiate you down. For that reason, you want to put it in their court. You want to try to have them speak first, drop a number first, and then you negotiate them up. The first method to value a company is the Berkus Method. This method is going to be focusing on the following factors. The business idea Having a prototype Strength of the management team Strategic relationships Having rolled out a product or starting sales. This method is a great one for pre-revenue startups. But, essentially, you
need to go back and add the values that are assigned specifically to those factors that we outlined. The next is going to be the Scorecard Method. What this method does is compare against other companies that may be at your same stage or maybe in your same location or in your same segment and will be relying on the following factors to put a value to the business. The strength of management The size of the opportunity The product or the technology The competitive environment Marketing and sales Need for additional capital Miscellaneous factors The next one is going to be the Venture Capital Method. What the Venture Capital Method does is focus into the future, the possibility, the potential. They’re focusing on the projections, those three or five-year projections, and putting a return or a potential multiple into that. That’s how they come with a price tag and with a valuation for your
business. The next is the Chicago Method. The Chicago Method focuses on the cashflow. It’s going to have the best case, the worst case, and the base case scenario depending on what’s going to be the outcome and the potential scenarios. But again, all around cashflow. Then, you’re going to have the Risk Summation Factor as a way to value. Here, what it’s going to look at is different factors, and depending on where you’re at, it’s going to extract value from the actual number that it is coming up with as a result of this exercise. Some of these factors are the following. A potential exit Reputation International Litigation Technology Competition Funding Sales and marketing Manufacturing Legislation Stage of the business Management There are actually different ways that you can use to increase the valuation of your company much quicker, especially when you’re in the process or in the
middle of getting that deal done. So, those are the following: presenting much better. One of the things that I see all the time is that when you’re doing the presentation, you really need to nail it on storytelling because many of those investors are investing in the future in the possibility of your business. So, by nailing it on the storytelling, where you’re narrating what’s happening, what are you tackling, the why, the what, the how. People are going to get really excited to jump in and come in with you. It could get to a point where price is not an issue. They just want to be in. That happens when you master storytelling, and when you have a lot of people that are interested in jumping in, and essentially, you get oversubscribed quickly on your round of financing, which means you don’t have enough space for everyone that wants to participate, and that’s the way they’re going to be
pushing the value up. You need to start selling. If you really believe that the revenue is something that is pulling you down on the valuation side, you need to get out there; you need to close customers, large accounts, whatever that is to continue to move the needle forward. Because that traction, that progress around the sales and around the revenue is going to help that investor or that acquirer to understand that you are heading in the right direction, and maybe there are different multiples that they can use around your valuation. Get your MVP or product right away because when you have that product out, when you’re getting feedback when you’re getting data points from the market where you can showcase that progress that people are really into your product or service that it’s flying off the shelves. You can use that as a way to tell the investor that what’s coming is really big,
and it’s going to create that excitement and that fear of missing out because they’re going to believe that if they don’t jump in, then their ticket is going to be much, much more expensive down the line. You should also recruit A+ talent, the best talent because ultimately, if you have good, good people that are involved in your business in the execution, that is going to be a plus, and it’s going to increase that potential valuation that the investor is giving you because it’s not just about the product or the service, it’s also about the people that are behind it. If you have people that have done it before, that have really good bios, good CVs, then you’re going to be able to use that as a way for leverage to increase the overall valuation of the business. Another way of doing this is to position yourself against other potential players, competitors, either direct or indirect,
because you can go into the meeting, and the investor could tell you, “I think that your valuation is x.” But you can hit back and say, “Look. I understand, but right now, the market, you need to know that it’s paying between x and y based on our research and what we’ve seen some of the companies out there that are either directly competing or indirectly competing. Essentially, when you tell them what the middle of the valuation is in that range, it’s going to be very hard for that investor or for that acquirer to negotiate you on the number. That’s going to be a very good way to just finish and nip it in the bud. With that being said, I hope that you like this video. Make sure that you leave a comment and let me know what you’re thinking and what you’re dealing with, with your valuation, with the valuation of your business. Also, Like this video, and then also subscribe to the channel
so that you don’t…